Banks may need 2 years to regain appetite for risk

PUBLISHED : Monday, 27 April, 2009, 12:00am
UPDATED : Monday, 27 April, 2009, 12:00am

It could take Hong Kong banks up to two years to recover from the blow to confidence delivered by the global financial crisis and resume a more aggressive approach to risk management, Hang Seng Bank's outgoing head of treasury Jack Cheung Tai-keung says.

Local banks' risk appetite had sunk deeper than ever because of the crisis and uncertainties still lay ahead, he said.

Many had switched investments to the safe haven of government-guaranteed bank paper.

Globally, the impact of the crisis on bank balance sheets has been devastating. Write-downs and credit losses of banks and brokers worldwide had reached US$956.8 billion, Bloomberg data showed.

Earnings of many Hong Kong lenders reflected the same trend last year, as they were forced to write down the value of investments in troubled securities, which included structured investment vehicles and collateralised debt obligations.

Hang Seng was one of only a few local banks that had no exposure to the two products, but it was still required to make an impairment provision of HK$1.37 billion to reflect the deterioration of the credit quality of some of its investments.

'Banks may be willing to begin taking some more risk on investments if the economy picks up next year,' Mr Cheung said.

He added that he hoped their confidence might be fully restored by 2011. Whether banks could generate reasonable returns on investments after taking a cautious approach depended on the quality of their portfolio and their funding structure.

'They could generate meaningful returns if their investments are now mainly in senior bonds and securities with higher ratings and they have adequate liquidity to fund those assets,' he said. 'But those relying on borrowings to fund their assets may still have pressure on profitability.'

Mr Cheung said the availability of funding in the market had not yet returned to normal.

Even though the situation had improved in the past few months, many banks remained reluctant to lend to each other, prompting governments worldwide to introduce measures to ease the resulting credit crunch.

While the end of the 'winter' for financial markets could be approaching, uncertainty remained, particularly in the face of challenges such as rising unemployment.

Hang Seng had taken a more prudent approach to investment after the global financial turmoil, but the interest-rate and foreign-exchange environments would be more favourable for banks later this year, said Mr Cheung, who joined HSBC in 1982 and moved to Hang Seng in 2004. He has decided to take a 'sabbatical' and will leave the bank next month.